RISK ASSESSMENT

Further slowdown in 2019

Portugal’s economic expansion slowed in 2018, keeping step with the other eurozone economies. Although growth in household consumption moderated somewhat, domestic demand remained on a positive trend, supported by increased investment. External demand made a smaller positive contribution than in 2017. The slowdown in activity is expected to continue in 2019. Household consumption is set to stagnate as higher inflation and slower wage growth limit the increase in disposable income. At the same time, public spending should continue to be constrained by fiscal consolidation. Investment is poised to drive growth once again, reflecting the resumption of several infrastructure projects financed by European funds, as well as strong demand for housing, which will support the construction sector. Meanwhile, strong demand on the real estate market, driven in particular by the rebound in tourism, should continue to push house prices higher. Conversely, despite still-accommodative financing conditions, business investment is expected to falter on cooler external demand. Although deleveraging continues, corporate credit has increased for the first time since 2010, and company debt levels remain high. Portugal’s bad debt ratio decreased from 16% in 2017 to 12.4% in the second quarter of 2018, but remains well above the European average (3.6%). Although Portuguese banks are better capitalised and their net earnings have improved, the banking sector remains fragile. Following a loss of €1.4 billion in 2017, which took it below the regulatory capital requirement, Novo Banco, a structure created in 2014 following the bankruptcy of Banco Espírito Santo (BES), required a €792 million capital injection from the country’s resolution fund in 2018. The State is expected to contribute a further €400 million in 2019.

Further fiscal consolidation

Despite the cost of recapitalising Novo Banco, estimated at 0.4% of GDP in 2018, increased budgetary revenues, lower debt service and reduced public investment mean that the government deficit was reduced by more than targeted in the 2018 budget. To build on the fiscal consolidation efforts, the 2019 budget presented to the European Commission in October 2018 aims to achieve balanced public accounts, with a public balance of -0.2%. This target would also allow the authorities to meet the commitment to reduce the primary deficit by 0.4% made in the Stability and Growth Pact. However, according to the European Commission’s estimates, the government deficit may be slightly higher than expected. On the one hand, the slight economic slowdown expected in 2019 is expected to constrain the growth of budgetary revenues. On the other, the impact of measures such as wage increases (€50 million) and the end of the freeze on career progressions (€152 million) in the public sector is expected to be greater than expected. Finally, the State’s contribution to recapitalising Novo Banco will probably be larger than forecast. Although significantly lower than in previous years, a deficit of 0.6%, which would result in a structural deficit of 0.9%, would still be in breach of the commitments made under the Stability Pact, knocking the country slightly off the path towards the medium-term budgetary objectives. However, the Portuguese authorities have in the past kept to the budgetary trajectory, despite disagreements with the Commission. Despite fears in October 2018 of a possible contagion effect from Italian sovereign rates to other countries on the eurozone periphery, Portugal seems to have been spared. In 2019, sovereign rates are expected to remain low and will continue to support a decline in debt service to 3.4% of GDP. Public debt still remains high, but is on a downward path that is expected to accelerate.

The slowdown in exports in 2018 led to the emergence of a current account deficit. While export growth is expected to remain weak in an unfavourable international environment, robust performances in the tourism sector should help to narrow the deficit slightly in 2019.

Parliamentary elections in 2019

Since 2015, Portugal has been led by a coalition between the Socialist Party (PS), of which the current Prime Minister, Antonio Costa, is a member, and three other parties: the Left Bloc (BE), the Portuguese Communist Party (PCP) and the Greens (ENP). The coalition is in a unique position in Europe in that it has so far managed to lift its austerity policies while upholding commitments made to the European Commission. Despite several scandals involving members of the government, including mismanagement of the Monchiques fires and the theft of rockets from the Portuguese army, the coalition continues to enjoy strong support. With the centre-right losing ground, the parliamentary elections of October 2019 will probably return the coalition to power.

Last update : February 2019

Payment

Cheques are frequently used in Portugal and it is common practice to establish payment plans with post-dated cheques which are payable on presentation. If the bank account is not sufficiently provisioned, they are borne by the bank up to a maximum amount of €150. In the case of bounced cheques, an individual person or a company is prohibited from receiving or issuing further cheques for a maximum term of two years (or eventually six years, if there is a court decision).

Bills of exchange are commonly used for commercial transactions in Portugal. In order to be valid, they are subject to stamp duty, the rate of which is set each year in the national budget. A bill of exchange is generally deemed independent of the contract to which it relates.

Cheques, bills of exchange, and promissory notes offer effective guarantees to creditors against defaults, as they are legally enforceable instruments which entitle debt holders to initiate “executory proceedings”. Under this process, creditors can petition the court to issue a writ of execution and notify the debtor that this has been done. When debtors still fail to settle their debts, the creditors may request that the court officer issues an attachment order against the debtors’ property.

Electronic transfers via the SWIFT network are widely used by Portuguese companies and are a quick, reliable and economic means of payment. If the buyer fails to make a transfer, the legal recourse is to institute ordinary or summary proceedings, based simply on an unpaid invoice.

In the event of a payment default, creditors are not required to issue a protest notice before bringing an action to court, but such a notice can be used to publicise the matter and thus put pressure on debtors to honour their obligations, albeit belatedly.

Debt collection

Amicable phase

Amicable collection begins with the debtor being sent four demands for the payment of the principal amount. Interest on the principal can be requested, but is normally difficult to collect in Portugal. Payment agreements subsequently made between creditors and debtors can include guarantees to ensure payments will take place as agreed.

Interest rates are set by the Treasury Department. The rates are published in the Diário da República during the first fortnight of January and July each year, and are applicable for the following six months. These interest rates are applied by default, unless the parties involved in a commercial agreement have contracted otherwise.

Legal proceedings

Fast-track procedure

The order to pay procedure (Injunção), which is applicable to uncontested commercial claims, was established in March 2003. These proceedings, whatever the amount involved, are heard by the court in whose jurisdiction the obligation is enforceable, or the court where the debtor is domiciled. Since September 2005, these injunctions can also be served electronically.

The National Injunctions Office (Balcão Nacional de Injunções, BNI) has exclusive jurisdiction throughout the country for the electronic processing of order to pay procedures.

Ordinary proceedings

In cases of disputed claims, creditors can initiate formal, but more costly, declarative proceedings (acção declarativa), to obtain a ruling which establishes their right to payment. Once the claim is filed with the court and the debtor notified, a defence can be filed within 30 days. Failure to reply entitles the court to deliver a default judgment. If the judge rules in favour of the creditor, the court may order damages, if requested by the demanding party. They then need to initiate “executive proceedings” (acção executiva) to enforce the court’s ruling.

Under the revised Code of Civil Procedure, any original deed established by private seal (i.e. any written document issued to a supplier) in which the buyer unequivocally acknowledges his deb, is deemed to be an agreement that is enforceable by law. Since 2013, when the most recent revision of the Code of Civil Process was made, written signed payment plans can only be used to initiate executory proceedings when they have been recognised by a notary.

In the scope of the recent restructuring of Portuguese courts which has been ongoing since 2014, more courts specialising in commercial issues have been created. The number of Courts of First Instance has been reduced to 23 (in each district capital), while there are now 21 specialised courts (Secções de Competência Especializada) for commerical issues (secção de Comercio), commercial issues. These latter sections deal specifically with insolvencies and commercial company matters. During this same period, 16 sections specialising in Enforcement Procedures (Secções Especializadas) have also been created.

Legal actions in Portugal can take several years, depending on the complexity of the case. Enforcement proceedings can be faster, depending on the existence of assets.

Enforcement of a Legal Decision

Once all avenues of appeal have been exhausted, a judgment normally becomes final and can be enforced. If the debtor fails to comply with the decision, the creditor can request compulsory enforcement mechanisms before the court – either through an Attachment Order, or by allowing payment of the debt to be obtained from a third party which owes money to the debtor (Garnishee Order).

Foreign awards rendered in other EU countries benefit from specific enforcement mechanisms, such as the European Enforcement Order (which can be used if the claim is undisputed), or the European Small Claims Procedure. Awards rendered in non-EU countries must be party to a bilateral or multilateral agreement with Portugal on the recognition and enforcement of court decisions.

Insolvency Proceedings

Out-of court

A special extrajudicial administrative procedure (Regime Extra Juditial de Recuperação de Empresas, RERE) came into effect on July 1, 2017. This procedure for restructuring company debts is carried out by specialised mediators. It has been designed to enable creditors and debtors to reach a compromise, in a confidential and consensual manner.

Restructuring proceedings

The reforms implemented in 2012 included the introduction of a special rescue procedure (Processo Especial de Revitalizaçao, PER). The aim of this new procedure is to ensure the recovery of debts from debtors that are in a ‘difficult economic situation’ without starting an insolvency procedure. The management is obliged to request permission from the provisional judicial administrator in order to perform “particularly relevant acts”. During this process, the administrator prepares a recovery plan which must be approved by the creditors and a judge.

Bankruptcy

Insolvency law in Portugal also provides for insolvency proceedings (Processo de Insolvência). The main goal of these proceedings is to obtain payment for the company’s creditors through the implementation of an insolvency plan. Insolvency plans can be established under which the company is restructured and can continue to operate. Should this prove unfeasible, the insolvent’s estate is liquidated, and the subsequent proceeds are distributed among the creditors.